Oil prices rally as drilling slows

By Robert Grattan and Collin Eaton, Houston Chronicle

May 29, 2015Updated: May 29, 2015 8:12pm

Photo: Jerry Lara /San Antonio Express-News

Pump jacks extract oil and gas from the Eagle Ford Shale at a pad off Texas 72 east of Tilden. On Thursday, U.S. benchmark West Texas Intermediate crude oil fell as low as $45.23 per barrel during the trading day before closing down 26 cents at $46.38.

Pump jacks extract oil and gas from the Eagle Ford Shale at a pad...

A slowdown in domestic drilling sparked a rally on the crude markets Friday, adding some vigor to what had otherwise been a slow week for oil.

Traders have watched the weekly Baker Hughes rig count for signs that reduced drilling might lead to fewer barrels of oil and higher prices. The oil service company reported Friday that producers laid down 13 rigs this week, a return to double-digit drops after only one rig went idle last week.

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The oil patch’s pain coincided with reports of unrest in the Middle East and choppy progress on negotiations to return oil-producing Iran to the world market. Combined, those factors handed U.S. crude its largest one-day gain since April 15.

U.S. benchmark West Texas Intermediate futures closed up $2.62, or 4.5 percent, to $60.30 per barrel on the New York Mercantile Exchange. The U.S. benchmark contract has traded in a narrow range of $57 to $61 per barrel since late April.

But Friday’s falling rig count doesn’t mean prices are in for a sustained rally.

“Twenty percent of wells in a tight oil play account for 80 percent of the production. What people have been doing is laying down rigs outside of the sweet spot,” said Steve Trammel, director of unconventionals for IHS Energy.

For example, the Eagle Ford area added three rigs.

Production may flatten out or fall off a small amount, he said, but the effect will be mitigated by more efficient drilling and lower service costs.

Those changes will help companies keep the drill bits turning, even if the price of oil is lower, Trammel said, adding “$60-$70 oil is new $80-$90 oil.”

The industry still is contracting as it adapts to lower prices and those who sell their services and products to producers are forced to tighten their belts.

One oil and gas sector that hasn’t been suffering are refineries, said Tom Kloza, the co-founder of analyst group Oil Price Information Service.

Margins on taking crude and turning it into gasoline are healthy, Kloza said, and refineries are processing oil as fast as possible.

That increased demand actually has helped to support crude oil prices. U.S. inventories of crude oil fell by 2.8 million barrels for the week ending May 22, in part thanks to refineries running at 93.6 percent of their total operable capacity.